Five long years since the official end of the Great Recession, much like the national economy, the economies of the state of California, Orange County and the wider Southern California region have improved substantially compared to the darkest days of the crisis. Improvements are widespread: The pace of job formation has picked up, economic activity is progressing at a brisk rate and the housing sector has steadily turned a corner.

Home values up

One of the notable positive developments in Orange County, the broader Southern California region and the state of California is the remarkable improvement in home values over the past two years. The median single-family home price in Orange County was $642,000 in August, compared with a low of $425,000 in December 2008. Though this is still around 11 percent below the peak of $720,000 recorded in July 2007, the turnaround has been quite spectacular.

Household wealth up

The strong recovery in home prices since 2010 has provided an important boost to household wealth and thus to household spending, which is critical to the growth of the overall economy. However, meaningful further improvements in home values will more likely be driven by the fundamental factors that usually drive housing demand: growth of income, employment and household formation.

Construction up

Construction in residential and nonresidential sectors is also picking up robustly from the rock-bottom levels of the recession. In fact, construction is humming along quite nicely all across the Southern California region.

Housing permits up

Housing permits rose in 2013 at an annual rate of 45 percent in Orange County and 52 percent each in Los Angeles, Riverside and San Bernardino counties. Though still below the levels reached before the recession, expenditure on residential and nonresidential construction showed similar improvements. The broader six-county Southern California region showed an increase of 50 percent in housing permits, a 42 percent increase in residential expenditures and a sizable jump of 62 percent in nonresidential expenditures.

Our forecast calls for an increase of 14 percent in Orange County housing permits in 2014 and an additional 12 percent in 2015. After coming to a near-screeching halt during the deep recession and the weak recovery, construction in the Inland Empire should pickup significantly over the forecast horizon. Housing permits for the broader Southern California region are expected to increase by 17.6 percent in 2014 and 14.4 percent in 2015 with commensurate increases in residential and nonresidential expenditures.

Unemployment down

As expected, the outlook for the labor market has also improved dramatically for the region and the state over the past year. The metric that stands out the most is the unemployment rate; the headline unemployment rate for the state of California, for example, has fallen from an average of 10.4 percent in 2012 to 7.4 percent in August.

A similar trajectory can also be gleaned for Orange County, where the unemployment rate fell from a cyclical high of 7.6 percent recorded in 2012 to 5.4 percent in August. For the six-county Southern California region (Orange, Los Angeles, Riverside, San Bernardino, Ventura and Imperial), the average rate has declined from a high of 10.6 percent to 8 percent over the same period.

Looking at the employment gains by sector for the county over the last few years, employment gains are led by four sectors: professional and business services, leisure and hospitality, education and health care, and the construction sector, in that order.

home sales slowing

However, as we cautioned in our previous report, the frenzied pace is slowing down, particularly in Orange County, where home prices during the recession fell by less than the neighboring counties even at the depth of the recession. Some of the downshift in the pace of growth has to do with the end of the speculative buying after a large inventory of distressed homes flooded the market. Roughly half of transactions over the past few years were fueled by investor demand; now that prices have increased appreciably, there are fewer bargain deals.

Traditional home buyers constrained

Traditional buyers, unfortunately, have not entered the market at the robust rates that they were expected to. There are a number of reasons for this: Tighter lending standards, a weak labor market, languishing income growth, an overall snail-paced recovery and a general sense of less-than-usual optimism have restrained traditional buyers from actively participating in the recovery.

Rate of home price increases slowing

It is also the case that during the early phase of the recovery, investor demand was so large and the upside correction in home prices so significant, that now home purchasing is less appealing than it was just a couple of years ago.

The slowdown in home-price growth appears to be persistent, at least in the short term: In the last three months, the median home price compared to a year ago has risen by 4.4 percent in Orange County, 8.9 percent in Los Angeles and 11.7 percent in Riverside.

O.C.’s labor force growth lags state’s

However, as in the national case, the headline unemployment numbers may overstate the strength of the labor market recovery. Digging deeper into household employment data (from which the unemployment rate is derived), it appears that some darker forces may be at play.

For example, the growth of the labor force in Orange County appears to trail behind the state’s. This is a fairly recent development. … Orange County’s labor force was growing at a faster rate than that of the state from around mid-1990 until the start of the Great Recession.

The rate of labor force growth for the county has been quite muted since then, and though the labor force increases at the state level have also underperformed the historical trend, the results are more striking for Orange County. And this cannot be boiled down to population changes; population growth in the county has matched fairly well with that at the state level. This means that a lot fewer people are choosing to join the labor force in Orange County despite the fact that the employment picture is much improved compared to just a couple of years ago.

For example, the state of California added a total of 348,000 jobs (or 2.4 percent of the total) in 2012, 441,000 in 2013 (or 3 percent of the total) and 238,000 through August of this year (or 1.6 percent of the total). Orange County’s gains during this period were 37,000 in 2012 (or 2.7 percent of the total), 36,000 in 2013 (2.6 percent of the total) and 18,000 through August (1.3 percent of the total). So while job formation has picked up over the years for the state, Orange County is adding employment at a slower rate over the past three years.

Going forward, a possible concern is that the actual low unemployment rate in the county (currently at 5.4 percent) may indicate a tightening labor market which could lead to wage inflation, especially if the labor force grows at the sub-par rates witnessed over the past few years. It is too early to tell whether an improving job market will be able to draw a larger pool of potential workers currently sitting on the sidelines.

Source: 20th Annual Economic Forecast report, produced Mihaylo College of Business and Economics Dean Anil Puri and Mira Farka, co-directors of the Woods Center for Economic Analysis and Forecasting at CSUF.

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